Question

what is the problem of original sin

Answer 1

The original sin theory was first established by Barry Eichengreen and Ricardo Hausmann in 1999 as a condition "in which the domestic currency can not be used to borrow abroad or even borrow domestically over the long term." Based on their measure of original sin (shares of domestic currency-denominated bank loans and foreign bond debt), they showed that original sin was present in most developed economies and irrespective of high inflation and currency depreciation records. This early research however left as an open question the origins of original sin.

Researchers found that, over time, almost all countries (except the US, Eurozone, Japan, UK, and Switzerland) have suffered from (international) original sin. Eichengreen, et al. concluded that flaws in national macroeconomic policies and structures are not statistically related to original sin, and found that country size was the only statistically reliable determinant of original sin. In addition, they argued that the key factors (which are beyond the control of an individual country) for the original sin were the cost of foreign transactions, network externalities and global capital market imperfections.

In economics literature, there are three distinct indicators of original sin. These measures are mathematically described as one minus the fraction of the applicable total of own currency-denominated securities. Initial levels of guilt ranged from 0 to 1. A high measure of original sin indicates a nation is suffering from high rates of original sin. Thus, a country that issues all of its foreign currency securities would have an original sin measure of one, whereas a country that issues all of its domestic currency securities would have an original sin measure of zero.